Buying strata title property in NSW – the need for urgent reforms
August 31st, 2023
When acting as a Sydney buyers’ agent for owner occupier or investor buyers of NSW residential and commercial strata properties, we prefer properties with scarcity value.
Such value arises because of a building’s location together with other attributes such as being in the relatively rare ‘missing middle’ of residential buildings between one and eight storeys high, an irreplaceable icon in Sydney’s financial core or in a well-resourced larger residential building with an established track record.
We also usually advise against buying off the plan (OTP) or in any residential buildings less than six years old such as those falling under the remit of the Office of the NSW Building Commissioner established in 2019.
While some developers, financiers and private certifiers see incumbent Building Commissioner David Chandler as the Devil incarnate, this article discusses why and where we believe a similar ‘root and branch’ approach to Mr Chandler’s is long overdue in the world of all older strata titled properties.
In addition to several strata title buying tips, next month’s second and final strata title article will discuss why Mr Chandler’s achievements might see a shift in our bias against buying OTP in the case of certain commercial and residential urban renewal developments on former strata titled sites which have taken advantage of the increasingly popular 75% consolidation rule.
What is strata title?
We assume most readers are familiar with the present NSW strata title regime but for those wanting a refresher, the NSW Government “Buying a Strata Property” is a useful link.
NSW residential strata – a snapshot historical perspective
According to land law authority Professor Peter Butt, Australia led the world in the field of strata title which is a comparatively recent development having first come into force in NSW on 1 July 1961.
Fast forward just 62 years to 2023 and there are over 85,000 strata schemes listed on the NSW Government Strata Hub with approximately 50% of the population of Greater Sydney projected to be living in strata scheme buildings by 2040.
Given this revolutionary pace, it is hardly surprising that strata governance regimes and ways of doing business rooted in the 1960’s are no longer fit for purpose as we approach the end of the first quarter of the 21st century.
Typical strata organisation
While there are several permutations, the management of residential and commercial NSW strata schemes typically involves a Chairman, Secretary and Treasurer who are volunteers elected annually by the other owners comprising the Owners’ Corporation (OC).
Once elected, those office bearers, sometimes with other owners, form a strata committee and sub committees if required.
With the State Government favouring larger buildings in an increasingly complex world, we question whether strata committees run by well intentioned volunteers is a sustainable long-term model.
That said, Curtis Associates is often amazed at the energy successfully expended on such labours of love: we recently bought for a high end client in a very well run, large residential strata building completed in the 1990’s whose strata committee meets about every fortnight to deal with myriad issues from an extant Fire Order to pet and renovation applications while administering multimillion dollar budgets and cash reserves. It also manages to publish a regular and professional looking building newsletter!
Strata Managers – too much concentrated power
While a small number of OC’s self-manage, most engage a professional Strata Management company with responsibility for a range of matters including collection of levies, payment of OC bills, insurances, repairs and maintenance, budgets, meetings, statutory record keeping and increasingly complex compliance issues.
Such companies come in a range of sizes and competencies with a minority enjoying justifiably excellent reputations.
As strata office bearers often lack the time or expertise to deal with the many issues that arise, developing a close dependency on the Strata Manager is inevitable.
Further, once engaged, the Strata Manager usually becomes entrenched if only because the engagement might be for a fixed term of up to three years during which the strata will likely have also committed to service providers and utilities sourced and recommended by the Strata Manager.
Changing Strata Managers can also be complex, time consuming and expensive with there being no guarantees that a new Strata Manager will be any better than the last.
These relationships are usually only as good as the individual manager appointed to the strata scheme and this in an industry with a staggering churn rate reported by the Macquarie Group to have been one in three in 2022.
It is hardly surprising therefore that these entrenchment tendencies have spawned an industry which rewards scale economies leading to even greater concentration and the lack of transparency we now discuss.
Ironically, the same Macquarie Group report found that while scaling up increased gross revenues, the high churn rates were shrinking the profit margins of the major players.
Why does this matter to strata title property buyers?
It is said that ‘power tends to corrupt’…
A clear and very disturbing example in this context is the extent to which Strata Managers restrict and curate information made available to strata searchers engaged by prospective buyers – referred to by industry insiders as the ‘white’ file.
Suppressed topics in the ‘black’ file usually include the true extent of disharmony in a building as well as short term stays, major repairs and future special levies.
The obvious motive for such suppression is the preservation of property values within the building to further entrench that OC’s relationship with the Strata Manager.
The following extracts from standard Disclaimers in strata reports provided by two different strata searchers are typical and show how notorious the problem is amongst professional strata searchers and competent buyers’ agents:
From the first report (emphases ours):
…”[S]ome particular managing agents are in the practice of archiving records prior to the required period of five years”…
“…Owners Corporations are required by law to keep their strata accounts and records…However, there unfortunately is no external monitoring of this process; therefore, if the Strata Managing Agency and/or the Owners Corporation fail to keep a full record of its activities or fails to keep them in an accessible manner, any Strata Report… may be inadequate.”
“…[S]ome Owners Corporations may deliberately withhold information”…
“Strata Managers are not obligated [sic] to be available for interview to obtain information. Some Strata Managing Agencies prohibit staff from providing verbal advice or disclosing strata information to anyone other than lot owner/s”…
From the second report in late 2022:
“… the records…[maintained by one of the largest Strata Managers in the industry] are held in an unprofessional manner…“Documents and files not sighted in the records of the Owners Corporation made available at the time of the inspection [include] emails and attachments on the records management system, Defects file, Legal file, Current/works in progress file [and] Quotes/Work Orders files.”
Five months after that report, occupants and neighbours of that relatively small building were daily exposed to over four continuous months of almost deafening jackhammering to remove some concrete spalling.
Despite those works and foregone rent on two units being funded entirely by the building’s OC, there was no reference to any such expenditure or spalling in the strata records, including in the financial statements and budgets annexed to that strata report.
Our due diligence over 17 years has uncovered several such examples including in relation to hostile neighbours and flammable cladding – the latter being a topic which was the subject of the important NSW Court of Appeal 26 May 2023 decision in Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114.
The fact that these practices are the accepted status quo and that such Disclaimers are even necessary, both expose an outrageous regulatory failure with the only existing sanction being the toothless and uncertain material facts Regulations discussed in our 31 May 2022 Newsletter .
Final word
Call yet another inquiry, appoint another Mr Chandler and in the meantime, mitigate these risks by engaging a competent buyers’ agent like Curtis Associates.
